From Boring Money Bulletin October 2017
Fixed Fee (R)evolution
Two significant pricing shifts this month as robo MoneyFarm alters its pricing structure and Interactive Investor announces its new model as it combines with TD Direct Investing and swallows up Trustnet Direct. Fixed fee platforms used to account for 9% of DIY investment assets. From December that will jump to 17%.
In November, MoneyFarm changed its pricing structure for both small and large portfolios and Interactive Investor announced its new model as it combines with TD Direct Investing and swallows up Trustnet Direct.
Firstly, to MoneyFarm. The robo previously charged nothing on the first £10,000 invested (apart from fees for the underlying investments). The new structure starts off at 0.7% for investors’ first £20,000. Adding fund costs of 0.3% leaves all-in charges of 1% – certainly not out of the ballpark, but no longer the cheapest place to invest. By way of comparison, on a similar sized portfolio Nutmeg would come out at 0.94% all-in for its managed portfolios and 0.63% for its fixed asset allocation solution; Wealthify would be 0.89% and Scalable Capital 1%.
As always we’re also mindful of the costs of simple multi-assets structures such as Vanguard’s LifeStrategy, which can be accessed direct (with fewer digital delights and less of a steer) for just 0.37%. But our research suggests that this is not a battle which can be won on costs alone. And with robos clocking in at £250 a pop to acquire a new customer (see our Customer Acquisition Report) it’s no wonder that the revenue line is under constant analysis.
The old structure was especially positive for those just starting out with investing. Our research has found that charges can be a bit of an alien concept for first-time investors. They tend to be used to free bank and savings accounts. Finding out that they have to pay someone to hold their money can come as a surprise (particularly if this only appears at the end of the on-boarding process). Being able to start off “fee-free” removed one of the many barriers for first-time investors. However, offering a freemium model is costly if most people are sitting at the ‘free’ end – particularly in the nascent robo-market, where our research confirms that average account sizes are relatively low. MoneyFarm reported revenues of just under £168,000 in 2016 (they launched in the UK in February 2016).
Now we turn to Interactive Investor. The platform has announced that the new charging structure for the combined business will be similar to the existing Interactive Investor model, consisting of a quarterly fee which provides ’trading credits’. The fee will increase from £20 to £22.50 per quarter but the resulting trading credits will now be able to be rolled over quarter-to-quarter (up to £90). Essentially, someone making fewer than 10 trades per year will be paying a flat fee of £90 for an investment account. Comparing this to a percentage-based platform charging 0.25%, you’d only need upwards of £36,000 invested before Interactive Investor’s offering wins (looking at cost alone).
Interactive Investor will also be taking over the running of the Trustnet Direct platform – which uses Interactive Investor’s tech – from December. Interactive Investor also operates Telegraph Investor and The Motley Fool's platform, as well as its alter ego SharePrice.
Until now, fixed-fee platforms have been a rarity, offered by Interactive Investor, Alliance Trust Savings, The Share Centre and Trustnet Direct, collectively making up around 9% of the online investing market. Now that TD and Trustnet Direct have been subsumed, Interactive Investor becomes the second largest platform after Hargreaves Lansdown, with a fixed-fee that’s highly compelling for all but the smallest portfolios.
We wait with interest to see how TD customers react to the change. Interactive Investor provoked much ire in 2012 when it first introduced the quarterly fee. It will now have to contend with explaining the change to a far larger client bank who have traditionally held the majority of their assets in listed securities.
On the positive side, while we do find in our research that investors are willing to pay more when charges are described in percentage terms, they also tend to rate fixed-fee platforms higher on ‘value for money’ – percentage-based charging can confuse people... and people like clarity.